ECONOMIC AFFAIRS Small business the casualty of misguided 'competition' policy

by Colin Teese

News Weekly, November 8, 2014

Exponents of free market economics talk endlessly about competition, as if it were the driving force of capitalism. It isn’t.

On the basis of their fundamental premise, anything less than unbridled price competition, resulting in a race to the bottom, will supposedly short-change consumers.

Graeme Samuel AC

A race to the bottom on price, however, will likely bring with it a drop in quality standards, and that becomes a self-serving process. The more competition impacts on price, the more competing businesses will be under pressure to sacrifice quality and/or service in order to stay price-competitive and still be profitable.

Yes, consumers will get cheaper prices, but for what? If they are paying less for poorer quality products or services, then the likelihood is that, measured against the “value for money” test, consumers will, at best, be no better off.

Likely, they will be worse off because, whatever happens to price and quality, consumers are not usually in a position to judge whether or not the lower price fully compensates for the reduction in quality.

That’s on the consumer side. On the business side, any race to the bottom on price will result in some perfectly sound (though smaller) businesses falling casualty to the price war, and not necessarily because of inefficiencies. Survivor(s) will not always be the most efficient businesses — they may merely be those big enough to survive a short-term price war.

At that point the handful of survivors — or just one survivor — normally enjoy a stronger place in the market and are able to recover anything lost in a price war by raising consumer prices. (NB: This is no backroom theory about what might happen; it is the frequent outcome of a price war, especially if price competition diminishes the number of competitive businesses left in the market.)

Advocates of “cut-throat” competition, usually without a strong business background, skip over these considerations. Practising businessmen can be counted on for a more balanced attitude to the matter of competition. And certainly big business is wary about too much competition — at least with its big rivals.

Australia’s official approach to competition policy has always had a narrow and somewhat naïve focus — spiced with a heavy overlay of free market ideology.

Those formulating our policies have never been prepared to take account of the fact that the tentacles of anti-competitive practices can reach beyond consumer protection and into the heart of business competitiveness itself. That is one of the inevitable consequences of imperfect markets.

Against this background I was pleasantly surprised to find an important element of the problems associated with competition policy being aired in a recent exchange of opinions in the letters page of the Australian Financial Review.

Jill Walker

The background to this exchange casts light on the way the different leaderships of the Australian Competition and Consumer Commission (ACCC) may approach their responsibilities.

Attempts by successive Australian governments to shape competition policy go back a long way. They have hardly ever been satisfactory, in part because for many years governments could never quite decide which side they wanted to protect more — business or consumers.

In part that problem remains. But a further overlay of confusion now exists, because the idea of competition has now been totally subsumed under free market ideology.

This makes it harder than ever to set policy. On the one hand, ideology dictates that free markets need no regulation. On the other are the pressing demands of common sense in favour of some kind of regulatory framework.

But what kind of framework is the question? Over the years the framework has been redefined and refashioned. The Hawke/Keating Labor governments of 1983-1996, wholeheartedly committed as they were to free market ideology, engaged a champion ideologue, Fred Hilmer, to fashion a new strategy. In 1995 the new approach was crystallised in the setting up of the ACCC.

In line with the practice already in place, and prevailing ever since, the ACCC was created, not as a government agency within the framework and responsibility of the Commonwealth public service, but as a so-called independent entity.

This difference in structure is more than a technicality. Public servants are officials on the public payroll, working for and under the direct control of an elected member of parliament — a Cabinet minister chosen by the Prime Minister to be responsible for a particular area of government policy.

By contrast, so-called independent agencies — including the ACCC — are staffed by publicly-paid officials. By deliberate choice, these officials operate outside direct ministerial control. The fiction is that, by virtue of this advantage, they will be isolated from “political influences” — as if any officials administering government policy can or should be immunised against such influences.

In practice, because of their nominal independence, these officials are subject to more pernicious influences — that is to say, special interest groups within society, including those with whom they might sympathise or even have had a previous working relationship.

Interestingly, the recent exchange of views, in the pages of the Australian Financial Review during August 2014, between the present and past leadership groups from within the ACCC, brings this problem into clear focus.

It concerns Section 46 of the Competition and Consumer Act. The present leadership of the ACCC has proposed amending the existing provisions. As presently worded, these prohibit use of market power by big business for anti-competitive purposes.

The change proposed is intended to provide greater specificity to the existing language. Additionally, it places a more onerous responsibility on big business.

As proposed, the redrafting of s46 would read as follows: “A corporation which has a substantial degree of market power shall not engage in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition in that or any other market.”

The proposed amendment has drawn objections from two former ACCC commissioners, Graeme Samuel and Stephen King (AFR August 12, 2014). Samuel and King want the present s46 to remain. That is, they want no restrictions on big business power, so long as it is delivering a short-term gain to consumers.

In its response to that idea, the present ACCC leadership spokesmen, Jill Walker and Roger Featherston, point out that the narrow and oversimplified interpretation of what constitutes legitimate competition, as favoured by Samuel and King, carries with it important shortcomings.

The courts have made clear, for example, that a competitive advantage gained by superior research or innovation would be considered legitimate, but that damaging a competitor by less legitimate means might be unacceptable.

Walker and Featherston are at pains to distinguish between the competitive process (which can be either legitimate or otherwise) and the position of an individual competitive business.

In a competitive environment, businesses, small or large, should always be subject to legitimate competition.

The current leadership is apparently concerned that loopholes in s46 of the Act, as currently framed, could legitimise unfair competition by big business in the name of “competition”. The response from Samuel and King seems to suggest that this is precisely the kind of behaviour that should be tolerated.

On the basis of that interpretation, the amendment proposed by the current leadership seems timely and appropriate.

By contrast, Samuel and King want the power to deal with big business when it seeks to harm small competitors with questionable practices, while hiding behind the shield of legitimate competition. Behind this lies the perfectly valid assumption that in such a contest big business always has the capacity and incentive to harm small business — the reverse is never possible.

Ironically, only a couple of months after this exchange between former and present leadership of the ACCC, a specific instance has emerged involving the alleged behaviour of a major supermarket chain and its alleged misuse of market power. It is currently being investigated by the ACCC.

Speaking as a consumer, but one, hopefully, with a clear appreciation of how unfair competitive business practices might harm both business and consumer interests, I hope that the changes in s46 of the present legislation being advanced by the current leadership of the ACCC proceed into law.